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Learning From The Follies Of Venture Capital Process Keynote, IEEE TMC Conference San Jose, 2011

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1 Learning From The Follies Of Venture Capital Process Keynote, IEEE TMC Conference San Jose, 2011

2 Conventional Approach To Start A Business Is Hard On The Entrepreneur  The conventional approach is to raise a lot of venture capital to gain first-mover advantage  Haste-makes-waste mistakes can be fatal  Statistically 10 out of several hundred business plans get funded and maybe 3 would get to a meaningful exit  This low-yield approach can provide a satisfactory return to investors from a portfolio perspective…but takes a toll on the entrepreneur

3 Always Fall Back On Fundamentals To succeed, a business must create value efficiently to provide its investors and stakeholders an attractive return  Follow project management principles:  Do the right thing: Useful product concept, sizable market, valid business strategy, sustainable competitive advantage…  Do things right: Execution… identify and resolve show-stoppers, get the right amount of capital at the right time from investors who can help you succeed

4 Starting A Business Can Be Almost Risk Free!  If you start with a niche business within your field of expertise and make a long-term commitment to build-out the business over time one logical step at a time  This sensible approach lowers risk and enables you to make efficient use of capital to create value which is by definition what entrepreneurs do

5 You’ll Achieve Capital Efficiency Naturally… Launch a niche business within your field of expertise. Risks are further reduced if you grow the business over time and work toward an early acquisition  You’ll have insider insight and expertise to provide a competitive advantage  Initial capital would be low, you can manage with common sense, and mistakes are recoverable  You can get new product ideas from customer, make efficient use of existing infrastructure to grow the business, and raise additional capital at an attractive valuation

6 Gaining First-Mover advantage is not the only way to succeed Instead, for example, strengthen IP to avoid being shut out of the market and learn from mistakes made by pioneers

7 It is Prudent To First Develop A “Prototype Business” Even If you Want to go Fast  Take an orderly approach, which is to verify assumptions and refine strategy before making major commitments: Technology, market size, organizational makeup, operational details…Get everything right  Pass the acid test by getting orders from opinion- leading customers  …Then decide whether to build out the company quickly, develop the business over time, work toward an early acquisition, or abandon the project !

8 Business Prototyping Is A Useful Concept  It enables you to achieve capital efficiency  A proven business prototype is valuable because it enables potential acquirer to recognize the value the business could bring

9 A Tale of Two Startups & My Own Experience Jim and Janet Baker founded Dragon System, a speech recognition company in 1982…Acquired in year 2000 with 350 employees…whereas all other high-flying startup companies in this field failed. Segway, the personal transporter startup burned $150M of investors’ money Every one of the dozen or so built-over-time companies I incubated were successful: Newport, New Focus, Uniphase (JDSU), Iridex…, whereas investing as VC, we did no better than VC averages

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12 Makes Sense for All Involved To Entertain An Early Acquisition Because capital is being put to use efficiently  For the startup company: The founding team is most productive in the developing stage  For investors: They get higher ROI without having to take additional risks/dilution  For the acquiring company: It is capital efficient to develop a business concept that has been validated.  …That is system optimization!

13 Recap Start with an ambitious goal but proceed with prudence following project management principles Identify a product concept in your field of expertise to provide a competitive advantage Be well prepared and make a business case based on reality Either start with a niche business to grow over time, or develop a prototype business before making a major commitment to build out the business quickly Always work toward an early acquisition

14 To Students In The Audience… Knowledge, reputation and network are your resource to start a business.  Become an expert in a chosen field because generalist cannot compete  Also become broadly knowledgeable and aspire to become CEO. Never stop learning and take an interest in business and management  Work for a a well-managed company to prepare yourself. Take on projects to learn professional and leadership skills.  Reach out and develop relationships.  Yes, you can!!!

15 A Available at

16 Proceed With Confidence Milton Chang Incubic Management LLC


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